Tepid sales keep realty funds off residential project investments
Latest News »
- Utkal Express derailment: Railways put the death toll in UP train accident at 21
- Utkal Express derailment: Trains on Meerut line cancelled or diverted till 6pm
- Booty Patooti Bootcut Pants
- Rahul Gandhi taking steps to bring opposition parties together: Aiyar
- Shivraj Singh Chouhan will lead BJP in Madhya Pradesh polls: Amit Shah
Investments by real estate funds in residential projects have slowed down as property prices remain stagnant, sales tepid and the same set of projects come up for multiple rounds of refinancing.
Four years into the slowdown, the deal pipeline in residential real estate is drying up, said fund managers, at a time when there is no scarcity of liquidity and too much capital is chasing a few good deals.
ASK Property Investment Advisors, the private equity (PE) arm of financial services firm ASK Group, has around Rs1,500 crore of equity dry power to invest in residential projects. Compared to three investments in 2015, it did not invest in any project last year.
“Deal flow has been impacted because we do pure equity deals at land stage, but no one is buying land. Today it’s mostly high-cost debt deals that are happening but if one gives money based on future receivables from a project where prices have corrected and sales haven’t picked up, it becomes tough,” said Amit Bhagat, chief executive and managing director of ASK Property Investment Advisors.
“We intend to invest Rs1,000 crore this year because distress opportunities will rise with lenders putting pressure on some to sell land, and we can partner with developers to buy land,” Bhagat said.
PE deals in real estate dropped to $1.41 billion in 2016 from $1.72 billion in 2015, according to data by News Corp VCCEdge. Debt deals by PE funds and non-banking financial companies (NBFCs) also dropped to $2.07 billion last year from $3.64 billion in 2015.
A significant chunk of this has been deployed in office projects and shopping malls, which are still being lapped up by foreign investors, although investments in the residential space have shrunk.
For Kotak Realty Fund, which has around $400 million in dry powder, the number of investments was low in the last two years. It invested Rs155 crore in Chennai-based Alliance Infrastructure Projects Pvt. Ltd’s project in September 2016. In early 2015, Lodha Developers Pvt. Ltd raised Rs542 crore by selling non-convertible debentures to Kotak for a portion of its suburban Mumbai project.
“Project sales have been slow for a while now and that’s likely to continue. Residential project launches have slowed down and there is a pile-up of inventory. Refinancing deals are the main investment opportunities for funds today,” said Vikas Chimakurthy, director, Kotak Realty Fund.
Fund managers believe that 2017 is likely to be an equally tough year in terms of deployment. Apart from a few top developers, no one is looking at growth this year and developers who have raised money in the past are struggling to make interest payments with many unable to pay back the principal amount to investors.
With few project launches, the deal pipeline has got curtailed and has been steadily slowing down over the last 12 months or so, said Ritesh Vohra, partner (real estate) at IDFC Alternatives Ltd, the real estate investment arm of IDFC Ltd.
“Since most transactions are through the refinancing route, developers need to offer more security in case the existing cover is insufficient. In some cases, where developers have partly paid off the principal using project cash flows, refinancing remains viable within the same project,” said Vohra. “As an investor, we have done multiple deals with the same partners because of good overall earlier experience, and our comfort with their execution abilities and governance standards.”
Funds are also facing huge downward pressure on lending rates as NBFCs go all aggressive to lend to developers at lower rates. A few like Indiabulls Asset Management Co. Ltd and Reliance AIF Asset Management Co. Ltd are now looking to tap into the relatively better performing office sector and buy office assets.
“One has to be extremely cautious in investing in residential projects in this environment. Only Grade A developers with good projects that have adequate security in good locations, where the sales are not an issue, will attract PE funding. We continue to deploy monies in residential real estate, however, we have become a bit more selective with respect to type and quantum of security cover, stage of construction and quality and location of projects,” said Ambar Maheshwari, chief executive-private equity, Indiabulls Asset Management.
Khushru Jijina, managing director, Piramal Finance Pvt. Ltd, said general deal flow has been slow and it is riskier to do plain vanilla loans because of the continued slowdown.
“Developers need holistic solutions today and we like to look at the balance sheet of developers, to identify if there’s any gap and offer funding accordingly. We can look at a bunch of projects in one’s portfolio and offer refinancing, a bit of structured or preferred equity, whatever be the need,” Jijina said.